LoanRaja Blog- Personal Finance Guide

Competition in the high-yield personal loans market has increased with the entry of multinationals, private banks and Non-Banking Financial Companies (NBFCs). While banks have the advantage of low cost of capital NBFCs are free from many capital related requirements. They compete with banks in easy and fast appraisal and disbursements of loans. A present day borrower looks for more convenience, quick appraisal and decision-making, higher amount of loan and longer tenure. Banks may not offer the flexibility that a personal loan seeker expects.

This is where NBFCs are at an advantage. While they can’t compete with banks on lower interest rates NBFCs are competing very clearly on the service aspects by coming out with new products which offer larger flexibility to the client. Through innovative ways they are penetrating semi-urban and rural centres with limited reach of banks. In urban areas, NBFCs focus on segments usually neglected by banks like non-salaried individuals, traders, transporters, stock brokers, etc. But they have a higher rate of sticky loans.

Rising credit demand

India has a huge market for unsecured credit. Banks alone won’t be in a position to meet the growing demand. Although NBFCs are no replacement for banks they are snatching business from banks in personal loans, mortgage, insurance, car loans, AMC, MF distribution, insurance advisory etc. NBFCs are present where the risk is higher and chances of returns are higher. After facing stiff competition from banks in their traditional business of retail financing they have diversified to tap the opportunities thrown up by a fast growing economy. NBFCs know that the younger generation dreams big and is not averse to borrowing for an improved lifestyle.

Nationalized banks, private sector banks and multinational banks all offer personal loans. It meets a customer’s urgent need for cash and the lender is not bothered about the purpose of the loan. Eligibility norms, documentation and income criteria vary from bank to bank. So are the interest rates and other charges. Interest rate ranges from 12 to 30 per cent with a maximum tenure of 60 months. Customer’s advantage in taking a personal loan from a bank is that it will have well-established procedures and clear-cut norms on eligibility, income calculation and repayment. The cheapest personal loan is available at nationalized banks. The flip side is that processing may take more time than you have bargained for.

NBFCs’ strength

The core strengths of NBFCs lie in their strong customer relationships, good understanding of regional dynamics, service orientation, and ability to reach out to customers who would otherwise have been ignored by banks. Some of the leading NBFC players in the personal loan segment are CitiFinancial Consumer Finance India Ltd.,GE Money, Countrywide Finance and Cholamandalam DBS. Different NBFCs have different rates of interests and other charges. At the time of writing Countrywide Finance offers personal loans at 27 percent interest and 2 pc processing fee with 2 pc prepayment charge. CitiFinancial charges 22 per cent interest and 2 per cent processing fee with 4 percent prepayment charge. Though some players like Citi Financial and Fullerton go through a personal screening of customers, not everyone follows this practice.

In their bid to make a fast buck, NBFCs often hawk expensive loans to low-income groups, without seeking adequate income proof. Two successive defaults would bring the ‘unfriendly’ recovery agent to a customer’s doorstep. NBFCs are not as transparent as nationalized banks on the actual cost of personal loan. Borrowers at the time of sanction of loans may not be fully aware of the terms and conditions of the loans including rate of interest either because the NBFC does not provide details of the same or the borrower has no time look into detailed agreement. RBI directive last year to give a copy of the loan agreement to the borrower listing all the charges may improve the situation.

Comparative rates

Following is an example of how a public sector bank and an NBFC treat the same amount of personal loan with the same tenure. The amount of personal loan is Rs.25,000 with a two-year tenure:

Note: These rates may have changed, please check current rates at the time of applying

SBI Saral Personal Loan:
Interest rate : 14.5%
EMI : Rs.1,206
Processing fee : 1-2%
Prepayment fee : Nil after 6 months
Total interest : Rs.3,950.

Citi Financials Personal Loan::
Interest rate : 22 %
EMI : Rs.1,297
Processing fee : 2%
Prepayment fee : 4%
Total interest : Rs.6,127.

The process of applying for a personal loan is much more straightforward than that of getting a housing loan requires less documentation and faster approvals. The most common documents banks or finance companies need you to submit are proof of residence, identity, Form 16, bank statements and your latest salary slip. These of course may not be standard across all finance companies offering personal loans and some may require you to submit a few additional documents for verification.

Once you have submitted your documents, verification and processing may take upto a week. And public sector banks such as State Bank of India or Bank of Baroda may also ask for a guarantor even if they don’t ask for any collateral. They may require you to provide a guarantor even if you are an existing customer with an excellent track record. Production of all necessary documents is essential for a quick approval of your loan as your funds will not be released till the bank has verified all the information you submitted at the time of approval.

The most common documents you will be asked to submit when applying for a personal loan other than a passport size photograph are:

Proof of identity

Documents that can provide a proof of identity when applying for your personal loan may include a copy of your passport, driving licence, voter ID, PAN card, a credit card with photograph or employee identity card which are as an identity proof and signature proof. Very often employee identity cards are accepted only in the case of government employees or staff of government owned undertakings. Some banks may also refuse to accept driving licence as a valif proof of identity.

Residence proof

Banks offering personal loans will accept a copy of your passport, ration card, voter ID, or LIC policy as a residence proof. In case your present address is different from that given in these documents you can produce a telephone bill, electricity or water bill as your proof of residence. Some banks insist on proof of residing at least one year at the present address as they want to make sure that you reside within the city limits.

Proof of income

Documents you are required to submit as proof of income differ depending on whether you are salaried or self-employed.
If you are salaried banks will require you to submit your:

• Latest salary slip
• Form 16 for the last financial year
• bank statement for the last 6 months

There are banks, which seek bank statement for only three months. Professionals and government employees may be required to submit a proof of highest qualification for which a copy of your degree certificates are required.

Self-employed applicants will have to submit

• IT returns for the last 2 years
• balance sheet and profit and loss account
• proof of office lease such as utility bill, municipal tax receipt or title deed

Some banks will ask for proof of turnover (latest sales / service tax returns) and a proof of continuity in current profession which can be IT returns or certificate of business continuity issued by the bank.

A personal loan is the most popular form of an unsecured loan available to consumers. Although we often see advertising from banks and finance companies making it appear very simple to get such a loan, its rarely as simple as that. Since the loan is unsecured banks go to great lengths to determine that your creditworthiness and repayment capacity is verified and secure.

Eligibility norms and requirements may differ slightly depending on the bank, but broadly fall in the two categories:

• Salaried persons between the ages of 21 and 60
• Self-employed individuals between 25 and 65

Lenders also have different policies for the minimum income requirement and maximum loan amount offered. For example, ICICI Bank would require a net monthly salary income of Rs 8,000 whereas HDFC Bank may accept Rs 7,000 and Citibank insists on a minimum of Rs 8,500. Public sector banks such as SBI and other nationalised banks have different eligibility levels for customers in metros, urban and non-urban centres. Some banks consider gross salary for income calculation. The loan amount also differs from bank to bank. The personal loan limit depends on the borrower’s profile, income, repayment capacity and credit rating.

For government owned banks minimum loan amount offered is usually around Rs.24,000 in metro and urban centres and Rs.10,000- in rural/semi-urban centres. The maximum loan amount can go upto 12 times net monthly income for salaried persons subject to a ceiling of Rs.10 lakh. But some foreign banks like Standard Chartered and Citibank have higher limits. Most banks have lists of approved companies whose employees will find it easier to get a personal loan.

Some banks also verify your application against a negative lists of professions. Banks will usually prefer to offer loans to employees or owners of reputed companies which lend a certain amount of lending credibility to their employees. You also have to reside within the prescribed city limits of the bank. Most public sector banks insist on a guarantor for personal loan even for existing account holders although some banks may offer better rates and discounts on other charges. You can increase your eligibility by clubbing the spouse’s income and taking a joint loan.

Banks and other lenders use direct sales agents normally to run a background check on the loan applicant to crosscheck the information provided at the time of application such as details on employment, salary and the place of residence. The bank wants to be convinced of your income and surplus available to service the personal loan. This is done to ensure that you are capable of making regular payments on your personal loan and repaying it on time.

Be honest in your income disclosures and keep your credit rating high. This increases chances that your loan will be approved quickly, but if you have defaulted on any loans it may go against you at the time of verification and in case you have ever declared bankruptcy it will be very hard for you to get a personal loan